Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Annie's, Inc. second quarter earnings call. [Operator Instructions] I would now like to turn the conference over to Ed Aaron, Senior Vice President of Strategy and Investor Relations. Please go ahead, sir.

Ed Aaron

Thank you, Kelvin. Good afternoon, everyone. Thank you for joining us for Annie's fiscal 2014 second quarter conference call. With me today is John Foraker, CEO of Annie's.

As we begin, let me remind everyone that statements made during this conference call that are not historical facts, including any statements about the company's targets, beliefs, plans, opportunities or expectations, such as expectations regarding fiscal 2014 results and the planned acquisition, are forward-looking statements and are based on management's current plans, known information, estimates and projections.

Our actual results may differ materially from those projected in these forward-looking statements and investors should not place undue reliance on them. Annie's does not undertake to update any of these statements in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties.

There are a number of factors that could cause actual results to differ materially from those contained in today's forward-looking statements, including the risks and uncertainties described in today's press release and the Risk Factors section of our filings with the SEC, including our most recent annual report on Form 10-K and our quarterly report on Form 10-Q. Such risks include: Risk related to competition, new product introductions, our growth strategy, our brand, reputation, product liability claims, recalls and related insurance proceeds, economic disruptions, changes in consumer preferences, ingredient and packaging cost and availability, reliance on a limited number of distributors, retailers, contract manufacturers and third-party suppliers and on an outside warehouse facility, efficiency projects, intellectual property and related disputes, regulatory compliance, transportation, supply chain, inventory levels, seasonality and our planned acquisition of the Joplin plant.

Now our CEO, John Foraker. John?

John M. Foraker

Thanks, Ed. Hello, everyone, and thanks for joining us today. As you've probably seen from our press release, we have 2 pieces of news to share with you. One, our second quarter results; and two, our planned acquisition of our primary cookie and cracker manufacturer located in Joplin, Missouri.

I'd like to start by taking a moment to welcome Zahir Ibrahim to the Annie's team. Zahir joined Annie's this week and as we announced last month, will assume the CFO position on November 13. Zahir's strong business line, consumer products experience, deep technical skills and business partner ability make him ideally suited for this role, and we're excited to have him on board.

I'd also like to take a quick moment to recognize and thank Kelly Kennedy for her many contributions as CFO of Annie's. Kelly played an instrumental role in our successful transition to a public company. And on a personal level, we've all benefited from her positive attitude, energy and friendship. Kelly will be taking some time off with her family, and we look forward to welcome her back to her new role in January.

For the second quarter, we reported adjusted net sales of $57.9 million, up 24%, and adjusted diluted EPS of $0.28 versus $0.24 last year. Our sales performance in the quarter was very strong. At the retail level, consumption of Annie's products accelerated further in Q2, growing approximately 22%.

We experienced incremental sales strength in mac & cheese, as well as a continuation of strong growth trend in snacks. While successful back-to-school merchandising programs were a key factor, our baseline sales or non-promoted sales, accelerated in the quarter and were the primary driver of growth.

Consumption growth continues to be led by conventional channels, including strength in grocery, mass and club. We continue to make excellent progress against our key 33 initiative, which is an effort to expand contribution of our 33 most important items in the grocery and mass channels.

In grocery, sales of key 33 items grew over 30% in the quarter and accounted for 70% of our total volume in this important channel. This growth was driven by a balanced mix of new distribution and velocity growth. Despite our continued progress in this area, the average grocery store still carries fewer than 13 of our key 33 items. We still have plenty of runway ahead with this initiative.

Importantly, we also continue to be very pleased with our double-digit consumption growth in the natural channel, which demonstrates that we are maintaining the loyalty of our core consumers as we broaden the appeal of the Annie's brand. We're especially pleased with our snack business, where we gained significant market share in each category where we compete. Our frozen business is also clearly working in natural. We now hold the #4 share position in frozen pizza, and we've begun to receive natural retailer orders for our new frozen entrée products as well.

From a net sales perspective, in addition to robust base business trends in all major categories, growth in the quarter benefited from strong innovation. With the rollout of both micro cups and frozen entrées, innovation accounted for the highest percentage of our growth in any quarter since the IPO. We expect this trend to continue in the second half of the year as we continue to realize significant customer wins, especially in micro cups.

While we were pleased with the sales performance and SG&A leverage in the quarter, gross margin fell short of our expectation. As you'll recall, on the first quarter call, we indicated that gross margin could be down in the 100 to 150 basis point range in Q2. Our adjusted gross margin fell short of this range by a little more than 100 basis points for 3 primary reasons: First, our sales mix shifted significantly toward customers that carry lower gross margin, but which also require less SG&A support; second, sales of new product exceeded expectation, which was a drag on gross margin in the quarter, but represents a strong investment in our future; and third, we experienced short-term pressure from reserving for and selling through aged inventory of certain products.

As we look ahead to the remainder of the year, our current business momentum and second half growth plans give us confidence in our ability to achieve the upper end of our 18% to 20% adjusted net sales growth guidance. While we expect adjusted diluted EPS in the lower end of our guidance range of $0.97 to $1.01, we expect to exit the year with more normalized margin trends, positioning us well going into fiscal 2015.

Momentum in our business and in the natural and organic food sector more broadly gives us high confidence that we can sustain rapid growth well into the future. In planning for this future, we continue to make strategic investments in many areas of our business to give us the capabilities that we need to support our growth plan.

Along these lines, we are excited to announce our planned acquisition of the Joplin plant for $6 million, plus the cost of inventory and supplies at closing. The Joplin plant has been owned by a subsidiary of Safeway Inc. for many years and has been our primary manufacturer of our cookie and cracker products since the introduction of Cheddar Bunny more than 10 years ago. This acquisition is an attractive business opportunity that will help us go after the significant, untapped, growth and profit potential in our snack business.

The Joplin plant provides capacity to more than triple our current cookie and cracker production volume and will allow us to grow faster and more profitably than we otherwise could. As we grow our overall volumes, we expect our product line margins to benefit from fixed cost leverage, providing fuel for future growth. The plant will also serve as a platform for further innovation in snacks, as it has existing capabilities in a number of close-in [ph] areas for potential extensions.

As you know, snacks have been an important contributor to our recent sales growth. However, we believe we've only scratched the surface of our real potential in this part of our business. To provide some context, in the grocery channel, the category leader in mac & cheese is about 10x our size, while the category leader in crackers is over 40x our size. We know that consumers love our Cheddar Bunny and Bunny Grahams snack offerings. We see significant opportunities to broaden our product offerings and to expand and improve our mainline distribution, much like we are successfully doing in the mac & cheese category.

As we execute against these opportunities, we believe this part of our business will become significantly bigger over time. We have a number of ideas in the innovation pipeline to advance our efforts in the snack area. I'd like to share one of them with you today.

In the second quarter, we successfully tested a bag packaging concept for our cracker, graham and snack mix products. This packaging is strongly preferred by consumers, improves our price point competitiveness at shelf and offers potential for significant increases in mainstream distribution and breadth of assortment. The results well exceeded our benchmark and as a result, we intend to expand this program significantly over the next year.

While we continue to evaluate supply chain opportunities as we grow, we fully expect the hybrid model will continue to be the norm in our business. The conditions that made the Joplin opportunity possible and attractive are quite unique. Annie's product accounts for the majority of the volume produced at the plant, which is unusual for us. Our familiarity with the plant and its people is also deep. In addition to having a 10-plus year business relationship with both Safeway and the Joplin plant, our Head of Operations, Amanda Martinez, oversaw the Joplin plant during her tenure with Safeway as VP, Manufacturing Operations, U.S. Grocery. And finally, because of the attractive purchase price, this investment is also very consistent with our asset-light business model. All of these factors give us high confidence in our ability to execute, and we look forward to closing the transaction in April of 2014.

Looking ahead, we're well positioned to deliver strong growth in the second half of the year and beyond. Our innovation pipeline has never been deeper, our mac & cheese platform is performing exceptionally well, and we continue to make progress with our mainline initiative. And we're positioned for strong and potentially accelerated growth in snacks as we look out over the next couple of years.

With that, I'd like to turn the call back over to Ed to discuss our financials in more detail.

Ed Aaron

Thanks, John, and thanks for joining us today as we report our fiscal second quarter results. As a reminder, to provide better visibility into our normal operating performance, we're discussing adjusted financial results today, which exclude the benefits related to the pizza recall, primarily from insurance proceeds, as well as costs associated with the planned Joplin acquisition and registration filing. Reconciliations between our U.S. GAAP and adjusted results can be found in our press release and are also available in the Investor Relations section of our website.

Since the recall, pretax, we've recorded $1.5 million of insurance proceeds, including $1.2 million in Q2, compared to $2.8 million of recall-related costs. We expect to record additional reimbursement proceeds in future quarters. Now turning to second quarter performance.

Adjusted net sales were $57.9 million for the quarter, up 24% over the second quarter of fiscal '13. Volume was the largest driver in our year-over-year growth, with approximately 2% of growth coming from higher average selling prices. Growth in the quarter was led by our meals business, which grew 33% on an adjusted basis, as we benefited from both the strong base business and shipments of micro cups and frozen entrées. While growth was strongest in meals, we also experienced strong double-digit growth in snacks and dressings, condiments and other.

As John alluded to earlier, Q2 was an unusual quarter in that we achieved very strong top line growth despite continued order pressure from our largest customer. Sales to our largest customer declined to 19% of net sales versus 27% in the year-ago quarter, due to tighter inventory management, a difficult growth comparison and significant strength in the grocery, mass and club channels.

Despite a later Easter holiday, which will shift some sales from Q4 into fiscal '15, we expect sales growth in the second half of the year to be similar to the first half. Based on demand for new items, we expect the new products will continue to be a key driver of our growth in the back half of the year.

Turning to profitability. Adjusted EBITDA for the quarter was $8.8 million, up 16% over the prior year. Adjusted gross margin for the second quarter was 35.7%, down 260 basis points versus last year's second quarter, due primarily to the mix factor and inventory challenge that John discussed earlier.

The variability of growth per channel was unusually high in the second quarter. To put this into context, sales in the mass and other channel, which carry lower gross margins, but require more limited SG&A support, grew nearly 50% in the quarter, while sales in the natural channel declined year-over-year, as shipments to our largest customer lagged consumption. While we expected this mix shift directionally, the magnitude was greater than forecast. We expect customer mix shift in the second half of the year to be less significant.

Product margins were pressured by higher-than-expected sales of new products, as we experienced strong order demand for our new micro cups and frozen entrées. As we talked about in the past, new products tend to carry lower margins initially, but improve over time with scale. This is fundamentally very positive as successful new products are key to the Annie's growth story.

As John referenced earlier, we also experienced an inventory aging challenge related to certain products, which impacted our product margins in the quarter and resulted in increased inventory reserves. This challenge, which we believe will soon be behind us, accounted for about 100 basis points of the year-over-year gross margin decline in the quarter. When we provided our initial fiscal 2014 outlook in June, we stated expectations for gross margins to be approximately flat year-over-year. Based on year-to-date results and our second half outlook, we now anticipate a gross margin decline year-over-year, but this will be offset through SG&A leverage, resulting in operating margins comparable to fiscal 2013. We anticipate continued year-over-year margin pressure in the third quarter due to strong expected sales of new products and inventory obsolescence, which we expect will have a similar gross margin impact as Q2.

We also expect year-over-year pressure from inflation net of pricing in the third quarter. This reflects the impact of tight supply conditions in organic wheat along with more modest, year-over-year pricing compared to prior quarters. We expect to finish the year very strongly with gross margin normalizing in the fourth quarter, as we benefit from moderating inflation and productivity gains from our fat rabbit initiative.

Selling, general and administrative expenses were a clear bright spot in the second quarter. On an adjusted basis, SG&A expenses declined 190 basis points as a percentage of adjusted net sales, compared to last year's second quarter. While we continue to invest heavily in our business, strong sales growth and customer mix changes drove significant SG&A leverage in the quarter. We expect to realize further SG&A leverage in the second half of the year.

Turning to the balance sheet. Q2 was a strong cash flow quarter. We generated operating cash flow of $9.6 million and finished the quarter with over $11 million in cash and no debt. While a portion of our cash flow came from timing-related working capital benefits, we expect our cash balance to build further in the second half of the year, enabling us to fund the planned Joplin acquisition primarily with cash on hand.

In connection with the planned acquisition, we expect to enter into a supply agreement with Safeway to produce products on their behalf for a period of 3 years, helping us to cover our fixed cost as we grow our business. This agreement is expected to add less than $10 million of annual net sales at a relatively low gross margin. To the extent that the supply agreement impacts comparability, we intend to provide the transparency needed to analyze the performance of our core business.

As the Joplin acquisition is not expected to close until April, it will not materially impact our fiscal 2014 adjusted financial results. Including the impact of previously planned efficiency projects at the plant, we expect the planned acquisition to be roughly neutral to earnings in fiscal '15 and to positively impact our gross margin structure over the long term.

With that, I'll turn the call back over to John for his concluding remarks.

John M. Foraker

Thanks, Ed. Before we open it up for questions, I'd like to personally thank all of our employees for their continued hard work and ongoing commitment to our mission and core values. The quality of work, collaboration and teamwork I see here every day is impressive. We are executing well at Annie's in a high growth environment with potential for further improvement, as we continue to build capabilities to capture the significant business opportunities ahead of us.

I'm looking forward to welcoming the great employees of the Joplin plant to the Annie's team when we close the transaction in April. We will be excited to work with the Joplin team to drive significant growth and profits from this strategic investment. It will be an exciting time for the plant and for our overall snack business as well. I'm excited about the remainder of the year and the foundation we are building for growth and profitability in the years ahead as the leading brand and company in the natural organic food space.

So with that, I'd like to turn the phone over to the operator for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chris Growe with Stifel, Nicolaus.

Just had a couple questions for you. I want to ask, first of all, in terms of this quarter, the new product contribution, did you give, like, how much that benefited sales or maybe how much you expect for the year as far as [ph] percentage terms?

Ed Aaron

Chris, it's Ed. So we don't break that number out specifically. It was significant. It was several points of our growth in the quarter which, as we mentioned, is the highest of any quarter since the IPO.

And then, just to be clear on the -- your revenue growth being above the consumption growth. I found that interesting just also given you probably still had some inventory adjustments with your large customer. So how -- what was going on that allowed your revenue growth to exceed the consumption growth?

Ed Aaron

So a lot of that, Chris, has to do with new products. But keep in mind that on a year-to-date basis, we're actually still behind consumption growth. So we're at 19.7% sales growth for the first 6 months. And our consumption growth in the first 6 months is north of 20%. And that difference is really related to the order pressure that we've had with our largest customer.

Okay. And then just one last final question, if I could, which is, in relation to the pizza business, which is one where you've been looking to get that -- the ACV buildup for that product line and to promote more heavily. Did that happen in this quarter or does that happen more so in the second half of the year?

John M. Foraker

It will be more in the second half of year. Our position on pizza is where it was in the last conference call. So most of that activity is focused during prime frozen pizza consumption time, which is really the winter and into the spring.

Operator

And our next question comes from the line of Jon Andersen with William Blair.

Jon Andersen - William Blair & Company L.L.C., Research Division

I just wanted to ask about the comment that new product contribution was higher than expected in the quarter. If you can shed a little bit more light on -- was that kind of across the board? Was it one product versus another? And maybe are you seeing greater acceptance in one channel versus another? Just a better -- a little more color on where you're seeing kind of some outperformance in terms of the new product offerings.

John M. Foraker

Sure. So the 2 biggest components of the new product offerings were micro cups and our frozen entrées that launched. So I'll talk about each of them separately. So on micro cups, we've seen very strong acceptance of those. They're building quickly. They're up to about 20% ACV in grocery right now. And we see significant upside in cups ACV expansion through the rest of the year. We're seeing good repeat velocity on cups. And we're feeling really good about our growth opportunity there. On frozen entrées, we're earlier in that. We certainly have a big footprint of distribution with a major retailer. It's too early to call what repeat looks like, but we're happy with the performance there. And we're just starting to expand that now, carefully, out into other retailers and channels.

Jon Andersen - William Blair & Company L.L.C., Research Division

Okay, terrific. I guess on the impact of the 3 components that you mentioned on gross margin. I think, Ed, you called out the reserve for aged inventory being about 100 basis points. Is -- can you provide any more color on the other 2 components, the mix issue and the customer base and the new products? And then if you can talk a little bit about -- I'm guessing the impact from new products continues through the back half of the year. But when you talk about some normalization as you move into fiscal '15, a little bit more color on what a more normal gross margin might look like as we move into 2015.

John M. Foraker

So let's answer that in a couple of pieces. First, let me just give a little bit of color around the inventory issues we had in the quarter because we want those to be well understood. So really, there's really 2 issues that are in play here between Q2 and what we're signaling for Q3. The impact of some issues on obsolescence in pizza is really a Q2 issue. And then we have some co-packer transitions and product reformulations that caused us -- that we expect are going to cause us to write-off some packaging and ingredients in Q3. So on the pizza piece, we came out of the recall with no inventory at retail, no inventory in any of our distribution channels. And we had to make a call -- our best estimate for how much pizza to manufacture very rapidly so that we could meet the needs of the channel and fill the pipeline back up. We obviously, in retrospect, overshot that number a little bit. And it caused some pizza in the quarter to come into an aging status where we had to liquidate it out through closeout channels at a lower margin. We think the pizza part of that is behind us. In Q3, we have an impact on some co-packer transitions, where we've reformulated some products to improve them, make them better consumer offerings and move to some more efficient co-packer and co-manufacturers. So we're going to take a little bit of hit, we expect to, in Q3, which Ed signaled. The most important thing I'd like to say about both those things is that we think we could have executed them better. We made a number of changes in the organization, in our process and in the reporting, all the things that we're using to manage that better. We expect both those things to be behind us and a nonissue in our business, as they have been historically, by the time we get to Q4. And so I'll let Ed answer the question about the other piece.

Ed Aaron

Yes, so the other 2 factors in the quarter, actually, the most significant factor overall was the shift in customer mix. I don't have an exact breakout for you on that, but it was probably the biggest year-over-year driver. But the impact of new products was significant as well. And then there were some other factors that were -- just puts and takes that were not material in the grand scheme of things. As far as your question about how to think about fiscal '15, we're not quite prepared to talk about that yet, just given where we are in our fiscal '14. So we'll be putting some more texture around that in future quarters. But we did want to emphasize that we expect to exit the year, as we mentioned, with a more normalized gross margin trend.

Operator

And our next question comes from Mitch Pinheiro with Imperial Capital.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

So just on the channels, staying with that. Consumption was up 22% in the measured channels, you said up double-digit in the natural channel. Did I get that right?

Ed Aaron

Yes.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

And so within the measured channels, any color on -- is mass, club and grocery -- can you kind of color the strength of each channel?

John M. Foraker

Mitch, it's John. They're all performing extremely well with very similar growth rates. We're happy with the velocity across all of our channels, the year-over-year growth. I mean, the consistency across our big product platforms. It's very uniform.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

All right, terrific. And then, I didn't quite understand your talking -- when you're talking about Joplin, you were testing some bag package concept. Could you explain that? Is that just large bag format or what?

John M. Foraker

It's actually a little smaller bag format. All of our snack business right now, and since we entered the snack category over 10 years ago, has been a cardboard box in different sizes. And we've spoken to a lot of consumers. We've had a lot of Annie's moms contact us. And they think that a bag format that's resealable, more convenient, can be thrown in a purse, is something that's very attractive. So we've been working on this for a while. We've designed some products. We've tested them in retail, live retail locations. And they've performed exceptionally well. And so we are definitely rolling those out into more broader retail channels over the remainder of the year. And really, you should look to see a lot more from those over the next couple of years. We'll be talking about them certainly in our next couple of conference calls.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

And obviously, you look at cannibalization there, obviously, positive trends in that regard?

John M. Foraker

Yes, we have so -- such low levels of distribution on our base snack, cookie and cracker business in mainstream channels that -- especially in grocery, that there's very little risk of that. And to the extent there's risk in other places, we're going to manage the channels very carefully to make sure we mitigate that. But we think that the upside, in terms of higher volumes, unit velocities, the ability to build better loyalty and repeat with our core customers is just extremely significant. And it's a really big breakthrough for us. And we're really excited that it's coming at the same time that we're leveraging our capabilities on the manufacturing side with Joplin to really align the whole thing up to be a much bigger growth and profit algorithm in the future.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

And I imagine Joplin has the big -- the bag capability, is what you're saying already?

John M. Foraker

Well, they do have that capability, but we'll be bagging them in another existing manufacturing facility. But Joplin is a very high-quality facility that can make lots of really high-quality product. And we think, over time, we can leverage the great cost and quality out of there.

Operator

And our next question comes from the line of Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity, Research Division

So can you go into a little more detail on the larger customer and order patterns? We talked about it last quarter and then in your comment this quarter. Any more detail or kind of the logistics on how that's working that you can provide?

Ed Aaron

Hey, Scott, it's Ed. I'll take that one. So on the first quarter, we had mentioned that we saw order pressure that we thought was partially attributable to their implementation of a new inventory management system. We didn't expect a significant recovery in the second quarter. So when we called out expectations for a strong Q2, we weren't looking for significant growth contribution from that customer. The order pressure was more significant in the second quarter than we had planned, and it was fully offset by strength elsewhere. Going forward, we do expect normalization. And our consumption through that, the natural channel, is up, as we mentioned, in the double-digits. And the inventory has come down a fair amount. So we feel pretty good about that channel getting back to positive growth on a net sales basis.

Scott Van Winkle - Canaccord Genuity, Research Division

And Ed, you can, I mean, essentially, you can see the inventory in those facilities, right, with the new system? So I mean, you have a pretty good handle on where the inventory is, in warehouses versus retailer.

John M. Foraker

Yes, because of the challenges that we had or last quarter in Q1 and Q2, and because of the better systems capability and our focus on that, we have a much better handle on that than we have had historically. So yes, we feel good about the second half of the year and our ability to watch and manage transitions in that going forward. And I'd like to reiterate, this is a great thing for our business. Getting that big customer on more turns that are directly related to what's actually happening at retail is a fantastic development for our business. It's going to let us rotate quickly and be much more efficient on the supply chain side. But we just have to go through the transition process to get there.

Ed Aaron

And Scott, just one other thing to add. This was an unusually tough comp for us with that customer. I mean, if you look at our prior year comparison, sales to this customer, we're up in the 35% to 40% range. So we also had a tough comp.

Scott Van Winkle - Canaccord Genuity, Research Division

Got you. And then, if I could also ask about micro cups. And if you said this, I apologize, in the gross margin discussion. You, I think, indicated something like 50 basis points of pressure from micro cups. Did that play out as expected? It sounds like the distribution is a little ahead, that 20% ACV. And finally, is there any distribution in incremental channels? I think I asked the question on the last call and I still believe that, that product have a lot of distribution opportunity beyond traditional grocery and mass. Has that occurred?

John M. Foraker

Well, we call -- on the last call, we called about a 50 basis point impact from just heavier slotting on the introduction of micro cups in the quarter. We certainly experienced that as we expected. Micro cups are getting a great look from, not only all of our current customers and getting a lot of acceptances, and we have a lot of acceptances coming, as I indicated earlier. It's a little too early for us to talk about the expansion into other channels, Scott, but it is something that we're looking closely at. And we do expect, over time, that those products will get there. They're a great convenience-oriented product. We're getting strong feedback from consumers. And we think there's a lot of new places that consumers can find Annie's with an item like that.

Operator

[Operator Instructions] And our next question comes from the line of Bill Chappell with SunTrust.

Sarah Miller - SunTrust Robinson Humphrey, Inc., Research Division

This is Sarah on for Bill. Just a couple of questions that are more -- relate more to the acquisition of the manufacturing plant. One question being, why is it taking so long to close the deal?

John M. Foraker

Yes, we -- mainly because we wanted to plan -- there are a number of issues that we need to plan and get in place before we close the transaction. We wanted to give ourselves enough time to do those, to be in a position to execute well once we did that. We didn't really want to close a transaction like that in the end of our fourth quarter that could subject our fourth quarter to some uncertainty that we didn't want to bear. And because there was really no rush to do it. We feel -- we and the sellers feel really good about that timeline. And we think it's going to put us in a position to execute well once we own the plant.

Sarah Miller - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And are you going from -- I can't remember if Ed said this, but are you moving from several different co-packers to having all of your snack and cookie production volumes done in this plant?

Ed Aaron

Sarah, it's Ed. So right now, the clear majority of our cookie and cracker production is done at that plant. The exception is gluten-free items which are produced elsewhere. So -- and that's going to continue. So we're not looking to peel away business from other co-packers to fold it in here, and that gives us a lot of confidence in why we can execute.

Sarah Miller - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then last question on that. Is this kind of a new business model that you could potentially turn to in the future? Like if a mac & cheese manufacturer came up for sale, would that be something that you would look to buy in the future?

John M. Foraker

As I mentioned in my prepared remarks, we really don't see this as being a departure from our hybrid model. We think this is kind of an unusual circumstance, where everything came together just perfectly, where it made sense for us to own this manufacturing facility. We clearly will look at our supply chain as we grow. If we had a piece of our business that got big enough or we had a similar kind of opportunity, we would certainly evaluate it carefully. But you shouldn't expect, and people shouldn't expect, that there's any significant departure in our strategy from what we've been doing. The cookie and cracker business is somewhat unique. And this plant has been operated by Safeway for the last 10 years. But we've been such a big part of the manufacturing now that it's almost been like an Annie's facility in terms of our knowledge of it, our understanding of quality, the people there. And so it's a little bit of a different situation. And we're excited about it. We think our snack business is at a really key inflection point, and this is the perfect time to add this capability. And we think we've got the right internal resources and experience in manufacturing to be able to execute it well.

Operator

We have no further questions at this time. I will turn the call back to management for closing remarks.

John M. Foraker

Thank you very much, everyone. We appreciate you listening in. And we look forward to going and continuing to execute. Thanks.

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